Auditing and Control Within Organisations

Questions: Assume you are an auditor and are facing the following separate circumstances .All the following items are material .You can assume that management have refused to make any changes necessary to make the financial report true and fair so that the circumstances mentioned still exist. 1. The value of the write off for the Allowance for Doubtful Debts is inadequate .Management are unwilling to adjust it although the amount leads to a material misstatement of Accounts Receivable. The amount of the misstatement is limited to the Receivables and is able to be calculated. 2.A retailer provides a valuation for inventory at sales price less an allowance for sales margin. 3.The Block company has just been advised that its main customer who purchases 45% of its stock has just gone into liquidation.Due to the specific nature of its products Block company is unlikely to find another customer of this size.Block has been starting to have difficulties in making sufficient sales to continue operati ng. 4.The Croucher company has been valuing its buildings using the fair value method .Its buildings are currently shown in the balance sheet at their current market value of 18.5 million. The buildings had originally cost 12 million. 5.The Kaycee company values its inventory at LIFO and is unwilling to change it to FIFO as required by the Australian accounting standards.The amount of the misstatement is known and is limited to its effect on the inventory. Answers: Situation 1 Allowance for doubtful debts is a balance sheet account. It is the reduced from the total receivables of the company. This is regarded as contra assets account. It depicts the best estimate from the management side relating to the unpaid amount. It is the managements estimate that such amount will not be repaid by the customers. It directly affects the working capital of the company if this is understated or overstated. It is the responsibility of the management to record the allowance for doubtful debts properly in the books of account(Auasb.gov.au, 2016). Therefore instead of giving unqualified opinion auditor will give qualified opinion relating to this transaction of the company. A qualified opinion will be given because the amount is restricted to the receivables amount. There is material misstatement in the account which cannot be overlooked(Archive.treasury.gov.au, 2006). Therefore, it is the duty of the management to modify it according to the instructions of the auditor(Auditing and Assurance Standards Board, 2009). If management denies to the changes in the financial statements and auditor has not submitted the report to the board. Then auditor can modify its opinion and state it as adverse opinion. Auditor can take this decision on the basis that management has denied to take the corrective measures according to the relevant standards of the company(AUASB, 2010). Situation 2 Valuation of inventory is done at cost or net realizable value whichever is lower. This treatment is according to the relevant standard. This is the uniform standard on the basis of inventory is to be recorded in the books of accounts. But actually retailer has recorded its inventory at sales price less an allowance for sales margin which is not correct. Inventory is regarded as the largest current asset for any organization. Inventory valuation excludes the cost relating to the selling and administration. It affects the company's current ratio, working capital and current ratio of the company(CPA Australia , 2014). In this case the auditor will issue qualified opinion on the financial statement because inventory is not calculated on the true and fair view. Auditor will give qualified opinion because it is affecting the liquidity position of the company. Thus qualified opinion relating to this transaction is appropriate(CPA Australia, 2014). Situation 3 Third situation is relating to the company in which major customer who purchases the greatest proportion of the company material i.e. 45% of the stock of the company. These major customers went into liquation due to which company has to bear the loss of sales. Moreover right now company is not having any substitute for this customer. Therefore company is having ample of difficulties to continue the sales of the company(CPA Australia, 2016). This condition is hampering the going concern of the entity, which is a big thing for any company. Company has neither the intention nor the necessity to materially curtail its operations in the business. Therefore, auditor should state the mitigating factors due to which effect of the present condition can be minimized(charteredaccountants.com, 2016). When the going concern of the entity is not stable then auditor will give modified opinion. However primary responsibility of the auditor is to state true and fair opinion on the financial statements of the company(charteredaccountants.com, 2016). An auditor while reporting will include an explanatory paragraph also, in which it will describe the event which results into the non stability of the going concern(Standards.org.au, 2016). Moreover, auditor will consider the consideration of the management before stating his opinion over the matter. Thus block company auditor should consider the above stated points while giving his opinion on the financial statements of the company(APESB, 2011). Situation 4 In the given case Croucher company is valuing its building at the fair value method. The building is shown at the current market value in the books of accounts i.e. 18.5 million. However, the original cost of the building was 12 million. According to the standard of fixed assets building is recognized at the original cost. Therefore, it can be said that company has done upward revaluation(Standards.org.au, 2016). This shows that company has not represented its assets on a true and fair basis. In this case auditor will issue qualified opinion(Australian Accounting Standards Board, 2009). Situation 5 The Kaycee Company is measuring its inventory at LIFO basis instead of recognizing them at FIFO basis. According to the Australian accounting standard inventory should be measured at FIFO basis. This states that recognition criteria adopted by the management are not correct. First of all it is the duty of the auditor to inform the management of the company relating to this transaction(Australian Accounting Standards Board, 2009). Auditor will send written representation to the auditor relating to this transaction. Management after considering the written representation of the auditor; modifies the books of accounts accordingly then auditor will give qualified report(Standards Australia Limited , 2015). On the other hand if the management of the company does not consider the auditor's representation then auditor shall give an adverse opinion(Standards Australia Limited , 2015). Overall adequacies of the accounts are hampered if the accounting policy is changed by the management unnecessary(The Institute of Chartered Accountants in Australia, 1998). FIFO method records the inventory in sequence. It is regarded as the most common method and popular method of management accounting. FIFO method is more practical as compared to LIFO. Moreover it is the duty of the company to comply with the accounting standard. Situation 6 The Genome Company while preparing his financial statements does not disclose the related party because of the privacy issues. Related party relationship is regarded as normal feature of business and commerce. It has direct effect on the profit and loss of the company. Financial position of the company can be changed through the related party transactions. Thus it can be said that related party transaction plays a crucial role in determining the business course of action. Related party has an opportunity to enter into the transactions which are not permitted to the unrelated party(Laker, 2016). Thus it makes it materials to disclose the same in the financial statement of the company(Standards.org.au, 2016). Primary responsibility of preparing the accounts as per the relevant standards is the duty of the management. An auditor has secondary responsibility to express an opinion over true and fair view of the financial statements of the company(Australian Accounting Standards Board, 200 9). Audit of financial statements does not relieve management from its primary responsibility i.e. preparation of accounts according to the relevant standards(Archive.treasury.gov.au, 2006). Related party transactions are not independent in nature therefore it increases the responsibility of the auditor. Many transactions relating to the business are within the course of the business but this is not true for every transaction. Related part has the power to operate extensively therefore it is necessary to have true and fair disclosure. Thus auditor should inform management to make the relevant disclosure relating to the transaction. If management agrees and makes amendments according to the auditor then auditor should issue unqualified report(Tomasic, 2016). If manager do not agree with the recommendation and do not make any relevant amendments in the books of accounts; in that situation auditor shall issue qualified report to the Genome Company(Standards Australia Limited , 2015). Through this auditor draws attention of the stakeholders towards the relevant related party transactions of the company. It shows that transactions of the company are affected because of the [presence of the presence of the related party. It is the duty of the auditor to give written representation to the management. If the written representations are considered by the management then auditor can modify its report accordingly. Auditor will identify and assess the various risks relating to the related party transactions(Auditing and Assurance Standards Board, 2016). The auditor will respond towards the assessed risk according to the materiality of the transaction. Thus, it can be said that auditor will present modified opinion in this case(Auditing and Assurance Standards Board, 2016). References APESB, 2011. APES 210 Conformity with Auditing and Assurance Standards. Archive.treasury.gov.au, 2006. Australian Auditor Independence Requirements. Auasb.gov.au, 2016. Australian Auditing Standards. AUASB, 2010. Overview of the revised and redrafted Australian Auditing Standards. AUASB. Auditing and Assurance Standards Board, 2009. Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards. ASA. Auditing and Assurance Standards Board, 2016. Auditing Standard ASA 720 The Auditor's Responsibilities Relating to. Australian Accounting Standards Board, 2009. Related Party Disclosures. AASB. charteredaccountants.com, 2016. Auditing Standards FAQs. CPA Australia , 2014. A Guide To Understanding Auditing And Assurance. CPA.